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The financing of the federal government depends largely on the Internal Revenue Service's (IRS) ability to administer the tax laws, which includes providing service to taxpayers and enforcing the law so that individuals and businesses pay the taxes they owe. The President's fiscal year 2010 budget request details how IRS intends to allocate its resources to achieve these goals while also continuing its investment modernizing its tax processing systems. GAO was asked to (1) describe budget trends, including dollars and full time equivalents; (2) describe legislative proposals that, if enacted, could result in savings or increased revenues; (3) describe the requested increases in funding for new initiatives; (4) assess return on investment (ROI) information; and (5) assess and the status of the Business Systems Modernization (BSM) program. To do this, GAO compared the budget request to prior years, analyzed key documents, and interviewed IRS officials

The President's fiscal year 2010 budget request for IRS of $12.1 billion is a 5.2 percent increase of $603 million over the fiscal year 2009 appropriation, with increases for enforcement (7.6 percent), operations support (5.6 percent), and BSM (10.3 percent) and a 1.0 percent decrease for taxpayer services. The President's budget documents include legislative proposals aimed at reducing the tax gap. Five are directly supported by prior GAO work and could result in just over ten billion dollars in savings or increased revenues over the next 10 years, such as requiring information reporting on payments to corporations (potential increased revenue of about $8.2 billion over 10 years). The budget request includes $463 million for program increases, of which about 72 percent is for new enforcement initiatives. Four new initiatives are expected to cost $332 million in fiscal year 2010 with an initial ROI of 1.8, or a return of $1.80 on a dollar invested. By fiscal year 2012, the total 3-year investment is estimated to be almost $900 million and the annual ROI rises to 7.8 when new hires are expected to reach their full potential. IRS also provided a projected ROI for each initiative. IRS includes projected ROIs only for new enforcement initiatives, not existing programs. GAO previously reported that such additional information would be useful for funding and resource allocation decisions. While developing actual ROI information could be challenging, IRS does not have plans to compare actual performance results to ROI projections in the budget. Under BSM, the Customer Account Data Engine (CADE), a taxpayer account database, has so far cost over $400 million and delivered about 15 percent of the capability intended. IRS is pursuing a new strategy because of increasing complexities in system development and has suspended new work on CADE and another application while exploring the new strategy. A preliminary road map and cost estimates are due June 30, 2009. Until then, it is difficult to determine whether fiscal year 2010 funds are justified or adequate.

Recommendation for Executive Action

Status: Closed - Implemented

Comments: Although not at the program initiative level, IRS made a significant step forward in beginning to calculate actual ROIs for major enforcement programs. IRS captured actual revenues and costs for each of its enforcement programs - Examination, Collection, and Automated Underreporter (AUR) - from fiscal years 2009 through 2012. IRS reported this information in its fiscal year 2014 budget justification.

Recommendation: The Commissioner of the IRS should take steps to develop ROIs for IRS's enforcement programs using actual revenue and full cost data and compare the actual ROIs to the projected ROIs included in the budget requests.